Control spending and fix US deficit

America’s budget problem boils down to a simple question: how much will we let programs for the elderly displace other government functions – national defence, education, transport, etc – and raise taxes to levels that would, almost certainly, reduce economic growth?

What’s depressing is that this question has been obvious for decades but our political leaders have consistently evaded it. This includes and indicts Democrats, Republicans, conservatives, liberals and every president since
Jimmy Carter
, particularly
Bill Clinton
and
George W. Bush
, who clearly understood the problem.

Our political culture prefers delusion to candour. Liberals would solve the budget problem by taxing the rich and cutting defence.

Think again. The richest 5 per cent already pay about 45 per cent of federal taxes; they may pay more but not enough to balance the budget. Defence spending constitutes a fifth of federal spending; projected deficits in the next decade are similar. We won’t shut the Pentagon. Republicans and Tea Partiers think eliminating “wasteful spending" will allow more tax cuts. Dream on. The major spending programs, Social Security and Medicare, are wildly popular, with roughly 50 million beneficiaries.

Now come Erskine Bowles and Alan Simpson, co-chairmen of the National Commission on Fiscal Responsibility and Reform, with a plan. It would freeze government salaries for three years, increase the petrol tax by US15¢ a gallon, and slowly raise Social Security’s eligibility ages for early retirement and full benefits. These ages are now 62 and 66; they would go to 64 and 69 around 2075. Sensibly, changes wouldn’t start until 2012 to avoid threatening the economic recovery.

Unfortunately, the plan has much wishful thinking. It would cap federal spending at 22 per cent of the economy (gross domestic product) and taxes at 21 per cent of GDP. These targets represent modest increases over averages for 1970 to 2009: 20.7 per cent of GDP for spending; 18.1 per cent for taxes. But maintaining the targets assumes that healthcare costs slow significantly. Bowles-Simpson has few proposals to make that happen.

We need something more powerful: budget changes that redefine government to reflect today’s social and economic realities. Longer life expectancies justify raising eligibility ages for Social Security faster than Bowles-Simpson suggests. Wealthier retirees should pay more for Medicare. Somehow we need to control health spending. We should eliminate programs that are ineffective or serve narrow interests: farm subsidies, Amtrak and others.

To understand our predicament, take a look at federal taxes and spending as a share of GDP for 2006 (the last “normal" year before the slump) and projections for 2020 and 2035 published by the Congressional Budget Office.

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Though crude, the numbers capture the mounting pressures. There’s no room for big emergencies or new programs.

From 2006 to 2035, federal spending goes from 20 per cent of GDP to almost 29 per cent. Social Security, Medicare and Medicaid (including “Obamacare") account for all the increase.

The reasons: More elderly people and climbing health costs. In 2035, the 65-plus population will be 93 per cent larger than in 2010.

Paying for bigger government would require a tax increase of about 50 per cent.

If we want to avoid a tax increase – while honouring existing Social Security and healthcare benefits – we would have to cut all other programs by about 80 per cent. (And these figures are likely optimistic because interest on government debt is assumed to remain low).

The problem is not reducing the deficit. It is controlling spending in a way that seems socially just, economically sensible and politically tolerable.

If we are honest – neither party has been – it means asking how much we allow benefits for the old to burden the young through higher taxes, lower public services, slower economic growth and weakened national security.

Any genuine debate must be wrenching because government has promised more than it can realistically deliver, and lower benefits or higher taxes will leave many feeling (justifiably) mistreated.

No one would be happy. Liberals would have to accept sizeable benefit cuts; conservatives, tax increases.

Recognising this logic, America’s leaders have averted their eyes and held their tongues. President
Barack Obama
’s Obamacare made matters worse by increasing the least controllable spending.

The initial reception to Bowles-Simpson has been predictably tepid. But even if it passed Congress, it would be only a first step.